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Cheesecake Misses Ests in 4Q

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Cheesecake Factory Inc.’s (CAKE - Analyst Report) earnings of 51 cents a share in the fourth quarter of 2012 missed the Zacks Consensus Estimate by a penny and were down 3.8% year over year due to sluggish sales. Hurricane Sandy hurt earnings per share by around 1–1.5 cents.

Cheesecake Factory’s revenues fell 2.7% year over year to $464.7 million and lagged the Zacks Consensus Estimate of $467.0 million. Tough year-over-year comparison owing to an extra week in the fourth quarter of 2011 hurt sales to some extent. Further, Hurricane Sandy played foul with the quarterly sales.

Operating margin in the fourth quarter shrank 190 basis points (bps) year over year to 6.1% mainly due to reduced revenues overshadowing the benign cost structure. Cost of sales, as a percentage of revenues, declined 30 bps due to favorable bakery dairy costs as well as a bakery mix shift benefit. Other operating costs were down 20 bps driven by a favorable year-over-year comparison in bakery operations and lower marketing costs.

Store Update

The company currently operates 177 restaurants, including the units opened during the fourth quarter. In 2012, the company unveiled 3 units in the Middle East.

At present, management aims to open as many as 8 to 10 new company-owned restaurants in fiscal 2013. The company is slated to open 3 new units internationally in fiscal 2013. The company also remains geared to expand in Latin America. Its first location in Latin America is expected to be opened in early 2014 in Mexico City.

Full-Year Update

In fiscal 2012, Cheesecake’s adjusted earnings per share were $1.88, up 14.6% year over year. Revenues grew 2.9% to $1.81 billion buoyed by a modest increase in comps.

Guidance

For the first quarter of 2013, earnings per share are guided between 40-43 cents. Comparable store sales are expected to be flat to up 1% mainly due to the temporary shutdown of the restaurant in Hawaii owing to a fire and the adverse impact of the storm that hit the Northeast in early February.

For 2013, earnings per share are expected in the range of $2.10—$2.18 while comparable sales growth is projected in the range of 1.5%–2.5%. Management expects food cost inflation to be about 3.2% in 2013.

Management expects operating margins to grow in 2013 mainly driven by international growth as evident by the initial three Middle East units registering higher-than-expected volume growth. The additional locations scheduled to open in 2013 are also expected to contribute nicely to 2013 margins.

Our Take

The company is suffering on the sales front. It is likely to face some headwinds in its upcoming first quarter. Additionally, the recent comps underperformance by Grand Lux Café remains another concern.

However, Cheesecake’s focus on cost containment efforts, relatively benign food cost inflation, as well as international expansion is quite encouraging.

Cheesecake Factory currently carries a Zacks Rank #2 (Buy). Some restaurant companies that are also worth a look at the current level are Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report) carrying a Zacks Rank #1 (Strong Buy) as well as Burger King Worldwide Inc. and Krispy Kreme Doughnuts, Inc. (KKD - Snapshot Report), both carrying a Zacks Rank #2 (Buy).

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